Effect of mid-year convention on terminal value

Hi guys,

For the question: what is the effect of using mid-year convention on terminal value? This is my answer below, I was wondering if you guys could critique my thinking.

For Exit Multiples Method - no effect because you assume company is sold off at the end of the year anyway, so terminal value has to be discounted by an end-of-the-year factor, even if previous cash flows were discounted using mid-year convention

For Gordon Growth Method - again no effect because formula is cash flow x (1+g)/(WACC-g), the factor doesn't matter when it's infinitely large

The answer in the BIWS guide doesn't seem coherent which is why I am asking....

2 Comments
 

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